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How Alternative Lenders Are Out-Innovating Banks

Anyone who pays close attention to the financial sector knows alternative lenders are revolutionizing the process of getting business loans in ways the big banks have long neglected. But exactly how are these lenders out-innovating the banks?

In a recent Wall Street Journal article, the paper pointed to some thoughtful examples that show alternative lenders looking past credit scores and business plans. These include analysis of not just company data but social media accounts, as well as diner reviews on platforms like Yelp and Foursquare.

Showing just how ahead of the curve these alternative lenders can be, the Journal first cites Treasury Secretary Jack Lew. Speaking at a recent Small Business Administration conference, Lew applauded the novel approaches that alternative lenders are making possible. “These companies are using alternative measures to assess a business’s ability to pay back a loan,” Lew said at the conference. “They use data like real-time shipping schedules, records held in a business’s accounting software, and even social-media traffic to determine creditworthiness.”

Digging in deeper, there are a number of specific examples where alternative lenders were able to nimbly use non-traditional methods to approve a much-needed loan. In fact, the Journal spotlights the story of Ron Wendolowski, the co-owner of the DJ’s Delights restaurant in Asbury Park, N.J. Wendolowski was seeking a loan in 2012 to help him expand, but he was turned down by a bank because his restaurant was just two years old. He then applied for a loan from OnDeck, one of the largest alternative lenders, to help get cash. OnDeck proved worthy of his time and helped him out.

The Journal writes:

OnDeck analyzed credit-bureau data and DJ’s cash flow, and electronically checked state corporate filings and court records. It even checked diner reviews on social-media sites Yelp, Urbanspoon and Foursquare. Within a day, it approved a $6,000 loan with a six-month term. Since then, DJ’s has taken out three more loans from OnDeck. The most recent, for $20,000, carries a nine-month term. The daily payment requirement equates to a 34% annual interest rate. “The rates are higher than bank loans, but it’s a lot less aggravation,” says Mr. Wendolowski.

Clearly, there is a lot of room for alternative lenders to grow and innovate, especially with banks unwilling to lend to seemingly creditworthy small business owners like Wendolowski. We fully expect that this pattern will continue to hold true for the next several years, and if you’re a frustrated borrower like Ron Wendolowski, let us do the hard work of connecting you with some of these fast-moving alternative lenders.

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Jared Hecht

Jared Hecht

Co-Founder & CEO at Fundera
Jared is the co-founder and CEO of Fundera, an online marketplace connecting small business owners to the best loans for their business. He writes frequently on small business lending and management.
Jared Hecht